An ADP director has a relationship with the activist trying to shake it up — and it shows how messy Wall Street really is

BIll Ackman.REUTERS/Jonathan ErnstPershing Square, an activist hedge fund run by Bill Ackman, recently took a stake in ADP.

ADP's board includes the dean of Columbia Business School, Glenn Hubbard.

Pershing Square has close ties to the school — it donates hundreds of thousands of dollars for an investment contest for Columbia students.

Pershing Square's move to shake up ADP's board creates a conflict for the dean, though experts say it's easy to fix.

The human resources and payroll company ADP is under attack from an activist investor who wants to add new directors to its board as he seeks to shake up the company.

ADP says it'll consider the nominees, but for one of ADP's current directors, that could become a problem.

The activist who is after ADP is Pershing Square, the hedge fund run by the billionaire Bill Ackman. The director in question is R. Glenn Hubbard, the dean of Columbia Business School — an organization to which Ackman's fund donates.

It's a classic conflict of interest, and it highlights the small world that many Wall Streeters and business-school folks inhabit. Experts on corporate governance say there's also a classic resolution: Hubbard should recuse himself from board decisions that involve Ackman's fund.

It's unclear what Hubbard plans to do. He didn't respond to emails and voice messages seeking comment, and ADP declined to comment.

In a statement, Columbia told Business Insider that the "Business School is grateful to Pershing for its longtime support" and declined to comment further. Pershing Square declined to comment.

A testy back-and-forth

Earlier this month, Pershing Square disclosed an 8% stake in ADP, sparking a testy back-and-forth between the activist fund and the company that handles many Americans' paychecks.

In an interview with CNBC last week, ADP CEO Carlos Rodriguez compared Ackman's request to extend the deadline for nominating board members to "a spoiled brat in school asking the teacher for an extension for their homework." Pershing Square has said Rodriguez "unfairly characterized" their interactions to make the fund's efforts "appear unreasonable." On Thursday, Ackman said in a conference call that ADP had underperformed its competitors and that the stock could double in five years.

Pershing Square is seeking three board seats, including one for Ackman. ADP has said its nominating and corporate governance committee will evaluate Ackman's nominees "as they would any other potential directors."

That's where Hubbard's conflict comes in. As chair of the committee, Hubbard helps determine the slate of board nominees and identify and recommend candidates, according to the company's charter.

Hubbard's résumé includes board positions at the financial firms KKR, BlackRock, and MetLife, and he's been on ADP's board since 2004. His ties to Wall Street go back further than that, and in the wake of the 2008 financial crisis, he was criticized for publishing research that endorsed the financial instruments that helped cause it and for his ties to financial firms. Hubbard told The Wall Street Journal in 2011 that Columbia had beefed up its disclosure requirements for faculty.

Pershing Square Challenge

Pershing Square has close ties to Columbia Business School. Since 2008, Ackman has hosted an investment competition, called the Pershing Square Challenge, in which Columbia students compete for hundreds of thousands of dollars.

Last year, students won $150,000, donated by Pershing Square, which they could choose to keep or donate. In previous years, the money had to be directed toward the school, according to a Columbia press release, in which Hubbard expressed his thanks to "Bill for creating this challenge."

The ties put Hubbard in a position that should be disclosed to the rest of the board and to investors, said Martijn Cremers, a professor of finance at the University of Notre Dame.

"It would be better if investors learn about such relationships from the board/firm rather than the media," he said.

Glenn Hubbard.
Reuters
Hubbard shouldn't vote on any business decision between ADP and Pershing Square, said Simone Sepe, a professor of law and finance at the University of Arizona.

Sepe said the problem was Hubbard's relationship with Pershing Square as the school's dean, "which jeopardizes his independence," adding, "This is a very basic case."

Conflicts of interests like the one between Hubbard and ADP are subtle, according to Sepe.

"One of the measures to assess the success of a dean of a business school is the amount of donations a dean is able to obtain," Sepe said. "Because the hedge fund is contributing to the business school, that's a subtle form of conflict of interest, and the market should be aware of that."

Situations involving conflicts like this are not unexpected, not least for a dean of a prominent business school, according to Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

"It puts him in a funny position," Elson told Business Insider. "It doesn't happen that infrequently. The finance community is not a big world ... The busier the street you happen to live on, the more likely you'll have a conflict with folks that you're connected with."

In the mid-2000s, a campaign involving the activist Carl Icahn and Time Warner led to questions about a board member's fealty. Time Warner's board included Bob Clark, a former dean of Harvard Law School who also served on the board of Lazard, which was advising Icahn.

And in the early 2000s, a judge found that a litigation committee that Oracle had set up to investigate its CEO and other staffers was rife with conflicts. The committee was staffed by Stanford professors, and the CEO had previously donated millions to the university, according to a 2003 Wall Street Journal report that chronicled the case.